TMFBro (< 20)

August 2009

7

The Real Deal reports that Lehman Brothers ex-CEO Dick Fuld sold his 16-room co-cop in New York City for $25.87 million. He wanted $32 million, but he still made a tidy profit, having bought it for $21 million in 2007. [more]

8

William Black was a key federal regulator during the days of the savings & loan crisis. In fact, back then Charles Keating -- who ran the ill-fated Lincoln Savings and Loan and eventually went to prison -- wrote in a memo to his chief lobbyist "Get Black... Kill him dead." Black is also the author of The Best Way to Rob a Bank Is to Own One. [more]

8

Maybe it's because I don't have cable, but I don't watch much financial TV. So it's always a bit jarring when I come across Jim Cramer's show on the Internets. On the one hand, I don't see how anyone can take this guy seriously. On the other hand, it's more interesting than watching another suit being interviewed by another suit. I love the sound effects. And Cramer certainly has some brain power -- he graduated magna cum laude from Harvard, says Wikipedia -- though that's not the same as thing as predictive power. [more]

11

"[T]he category of 'personal consumption expenditures' includes pretty much all of the $2.5 trillion healthcare spending, including the roughly half which comes via government. When Medicare writes a check for your mom’s knee replacement, that gets counted as consumer spending in the GDP stats. At a time when we are wrangling over health care reform, it’s misleading to say that 'consumer spending is 70% of GDP,' when what we really mean is that 'consumer spending plus government health care spending is 70% of GDP.'” [more]

9

One of my first articles for The Motley Fool, way back in 1999, was anti-Social Security. Since then, I've somewhat moderated my view. It basically comes down to this: I'd be better off if I didn't have to pay the tax and could invest it as I see fit, but that's probably not the case for most other Americans. I've been saving for retirement since my early 20s, and -- as a Certified Financial Planner -- I should know a thing or two about investing. However, I've seen enough to know that most people save too little, too late, and not well.

You might be saying, "If people don't save, then it's their own darn fault, and they should suffer the consequences -- which is working longer, not the worst thing in the world." I actually have a good deal of sympathy with that argument. I suppose the counterpoint could be that if older people work longer, there will be fewer jobs for younger people entering the workforce.

Anyway, whether you think Social Security is a good idea or not, there's still the issue of it being unsustainable. People will often refer to it as "bankrupt." But how bad off is the program?

Douglas Elmendorf, the director of the Congressional Budget Office, posted a link on his blog to the CBO's recent Social Security analysis. According to their number-crunching, it would only take raising the payroll tax, currently 12.4%, to 13.7% in order to make the program sustainable. Sure, no one wants higher taxes. But that doesn't seem catastrophic.

Bruce Webb over at the Angry Bear blog described the results of the CBO report this way:

"Per this report Social Security will be able to pay out 'scheduled benefits' until Trust Fund exhaustion in 2043 and thereafter will be able to pay out 'payable benefits' at a rate starting at 83% of scheduled benefits and then gradually sinking to 78% by 2083. Even after adjusting for inflation benefits after 2043 will be better than retirees get today in real terms even though they will be a smaller replacement percentage. That is our children's retirement will be materially better than that of their grandparents if not quite keeping up with the working life gains of their own grandchildren."

That doesn't sound too bad to me. It certainly doesn't look like Social Security is "bankrupt."

But wait! What about the trust funds, which have nothing in them but IOUs from Uncle Sam? Where will he get the money to turn them into Social Security benefits checks in several years?

Well, maybe the program isn't as not-as-bad-off as it sounds.

For what it's worth, I would start fixing the program by raising the eligibility age before raising taxes. From then on, it would be indexed to life expectancy. [more]

32

Did you think that the pills you took were just between you and that stranger in a white coat? (OK, and maybe your insurance company, which has thousands of employees who can access your records.) [more]

7

While I will try to post these on Friday, I was at a conference over the weekend. So here it is, a few days late, an eclectic collection of people who have an opinion about what the future holds.

The Encouraging

Scott Grannis thinks equities are still a buy: "Equity prices are up about 50% from their March lows, but equities are still very, very cheap when compared to corporate profits and the level of interest rates. Technical indicators may call the current market "overbought," but this model suggests that equities are still suffering from a severely "oversold" condition when one considers the valuation fundamentals. The gap between theoretical and actual valuation, according to this model, says that equities today are worth about half of what they should be worth. To close this gap, interest rates could rise to 7.75%, or corporate after-tax profits could decline by over 50%, or equity prices could double. Or we could see some combination of much higher interest rates and lower after-tax profits."

Mark Perry points out that betters are betting on recovery: "Back in early March, the Intrade odds of positive economic growth in the U.S. for the third quarter was only 25%. Those odds of positive real GDP growth in Q3 have recently risen to 90%, as many economic indicators now point to an economic recovery and positive growth this quarter (July, Aug., Sept.)."

Mark Zandi tells the Voice of America that a rebounding housing market is key to a recovery: "I think it's a necessary condition. I don't think the financial system stabilizes nor does the economy gain traction unless the housing downturn comes to an end. And I think it is coming to an end."

While not a 100% encouraging statement, any kind of positive statement from Nouriel Roubini -- who says there are signs that global economies may be bottoming -- is noteworthy: "There is potentially light at the end of the tunnel, and advanced as well as emerging economies are showing signs of bottoming out of recession, but there is the risk of a double-dip recession in the second half of next year and into 2011."

The Discouraging

According to Bloomberg, Barclays doesn't think home prices have bottomed: "While an S&P/Case-Shiller index for May showed the first month-over-month price increase since 2006 and a 2 percent seasonally adjusted annualized drop, a more-accurate reading probably would have been an annualized decline of 10 percent to 15 percent.... Data reflecting a reversal of the seasonal benefit, as well as 'a tide of new foreclosure sales' as a moratorium on the seizing of homes put in place by banks subsides, will lead to 'renewed weakness' in the fall, they said.... They project that U.S. home prices will fall an additional 11 percent on average before bottoming next year, bringing the total decline to 40 percent from their peak."

Mark Hanson also thinks housing has farther to fall: "Every year, organic sales fall off of a cliff beginning in August primarily because kids go back to school in Sept. If organic sales follow typical seasonality trends lower again this year and foreclosure-related resales stay the same or rise (no reason they shouldn't), then the average and median prices will be pulled quickly back towards the distressed market price."

John Lounsbury thinks the most likely outcome is that our future will look like Japan's past: "My view is that the future will hold an experience that will probably have a mixture of flavors from many historic cuisines. I give low probabilities to a repeat of the Great Depression, as well as 'V' shaped recovery to sustained 3%+ positive GDP growth. Something like the Japanese experience of the past 20 years has a higher probability."Joseph Stiglitz also mentions Japan, and warns of a rocky road: "It would be a mistake to say, because we are out of the freefall and that we may have turned the corner, to say, well, we’re on the road to recovery. Remember, Japan turned that kind of tide, and it was years before they returned to normalcy. In the Great Depression, there were many periods when the corner was turned, and it turned down again…. I think there is a serious risk of an extended malaise and negative bumps along the way."